Tricks and Treats Handed to the Supercommittee

This column originally appeared in Tax Notes, a subscription-only publication, on October 31, 2011. It is reprinted here with the permission of Tax Analysts (http://www.taxanalysts.com).

By Diane Lim Rogers

Congressional committees had until October 15 to submit recommendations to the Joint Select Committee on Deficit Reduction as it tries to find another $1.5 trillion of deficit reduction. House Minority Leader Nancy Pelosi, D-Calif., labeled her Democratic colleagues' proposals "big, bold, and balanced."1 However, House Speaker John A. Boehner, R-Ohio, appears to have discouraged committee chairs from writing letters to the supercommittee. There was certainly no implicit endorsement of a bipartisan approach to deficit reduction coming from House leaders.

The Senate gave us at least a bit more reason for optimism, with several committees issuing bipartisan recommendations. Also, many outside interest groups have written their own letters to the supercommittee.

As the supercommittee continues to deliberate with just one month left before the Thanksgiving deadline for its recommendations, it now has a large grab bag of policy ideas to consider. Some are just the same old, discouraging tricks -- which is probably worse than receiving no advice at all. But some treats remain that hold promise for bipartisan proposals to be constructed and pursued -- if the supercommittee takes the hints that have come out of the recommendations process.

A. Lots of Tricks

1. Trick #1: Big things off the table. The Democrats in Congress were supposed to be the ones clamoring for a revenue-heavy approach to balance out the spending cuts already implemented. Yet in terms of tax policy, the Democratic letters fell short on specific, revenue-raising tax reforms, while the Republicans who bothered to mention tax policy only dug further into their ideological trenches to keep revenue at current levels.

The House Ways and Means Committee Democrats recommended that the supercommittee raise revenue, relative to current policy, by $1.5 trillion -- the amount recommended by President Obama -- and increase marginal tax rates on the rich by letting the Bush tax cuts for upper-income taxpayers expire and implementing a millionaire's tax in keeping with the so-called Buffett rule.

However, the Ways and Means Democrats avoided offering specific proposals that would raise revenue consistent with base-broadening tax reform and kept some of the largest corporate tax expenditures, such as the section 199 deduction.2

Meanwhile, the Senate Finance Committee Republicans suggested3:

revenue neutrality relative to current policy (not relative to current law);

capping marginal tax rates at 25 percent (an idea from the Bowles-Simpson commission, but without the commission's companion strategy of base broadening);

not letting expiring tax cuts actually expire; and

keeping corporate tax rates low for the sake of competitiveness and job creation.

In other words, the tax-writing Democrats want revenues to go up by raising tax rates on the rich rather than by implementing base-broadening tax reform, while the tax-writing Republicans don't want revenues to go up and are far more interested in reducing marginal tax rates on the rich than broadening the tax base. The Republicans' statement that the supercommittee should raise adequate revenue to pay for the tax expenditures and other government spending they want seems to be a call for small-government tax levels, but it seems likely that even the spending levels sought by Republicans can't be fulfilled by policy-extended levels of revenue.

However, Republicans have urged fundamental reforms to Medicare, Medicaid, and Social Security, a spending-cuts-only recommendation that shows no movement from the party's stance before the supercommittee's formation.

Ways and Means Democrats seem downright flummoxed over the role of tax reform in deficit reduction, stating their "position" as:

We believe that the important goal of tax reform is best served by working through the tax-writing committees in the House and Senate under regular order. Furthermore, a revenue-neutral tax reform would not help the Joint Select Committee meet the goal set for it by the Budget Control Act: deficit reduction. However, this does not mean the Joint Select Committee should not include proposals to address revenue in its work, merely that such proposals should represent a net increase in revenues.

They seem to be saying that revenues must come up for tax reform to contribute to deficit reduction (duh!) but also that they don't want to recommend or spell out any revenue-raising proposals to the supercommittee right now.

But Ways and Means Democrats are very clear on one thing: The supercommittee should keep its hands off Social Security. "Any discussions on further extending the solvency of the [Social Security] program should not take place in a deficit reduction context." Their position appears consistent with AARP's recent message to the supercommittee (do "not include any cuts to Social Security or Medicare benefits"), communicated via letter and television ad campaign, which my organization, the Concord Coalition, has criticized.4 At the same time, Ways and Means Democrats suggest little in the way of Medicare reform beyond cutting "waste, fraud, and abuse" and strengthening the expanded benefit provisions of the healthcare reform act.

So within the committees with jurisdiction over tax policy and the largest federal spending programs, the House Democrats have effectively taken all of Social Security and much of Medicare/Medicaid reform off the deficit reduction table, and Senate Republicans have taken revenue-raising tax reform (that is, revenues, period) off the deficit reduction table. (Tax-writing House Republicans and Senate Democrats chose not to write to the supercommittee, perhaps mostly because their leaders, Dave Camp, R-Mich., and Max Baucus, D-Mont., serve on the 12-member supercommittee.)

The corollary to big things being taken off the table is the magnification of the little things that remain as the only politically safe kind of spending to target for deficit reduction: wasteful spending. For example, House Financial Services Committee Republicans recommended that the metal content of pennies and nickels be changed (so that they don't cost more than they're worth to make), while the same committee's Democrats called for Treasury officials to stop getting rides on military aircraft.

Democrats still prefer tax increases targeting very rich people and those corporations and industries with bad reputations (for example, big banks and oil companies). For example, the letter from the House Financial Services Democrats recommends a "big bank fee." Unfortunately, there are few good, substantial ideas for revenue-raising tax reform that actually would limit increased burdens to the top 1 percent of the population.

2. Trick #2: The magic of economic growth. A number of letters from Republicans to the supercommittee suggest that growing the economy is an effective deficit reduction strategy and that growth is encouraged by lower taxes and less regulation. Finance Republicans suggest that temporary tax cuts should never be allowed to expire and that the officially measured cost of tax cuts should take into account the highly uncertain dynamic macroeconomic effects of the policies. House Financial Services Republicans are highly critical of the Dodd-Frank Act's regulation of derivatives, arguing that the act swells "an already bloated federal bureaucracy."5

Those arguments for tax cuts and less regulation as effective in growing the economy, and, by transitivity, as effective at deficit reduction, are misguided. They confuse a shift in resources from the public to the private sector (or even narrow segments of the private sector) as a pure gain to the overall economy, failing to recognize how those shifts can actually hurt the economy. For example, deficit-financed tax cuts rarely pay for themselves even when they are effective at encouraging some private sector economic activity, because the loss of public saving usually far outweighs any increase in private saving.

3. Trick #3: If (only) I were a (budget) hammer. The budget committees could play an important role in deficit reduction by enforcing the mix of tax increases versus spending cuts. But what were their recommendations?

Both sides of the House Budget Committee remained silent in terms of official recommendations to the supercommittee, but a bipartisan letter from the chair and ranking member of the Senate Budget Committee called for:

biennial budgeting, allowing two-year budget cycles so Congress would have more time to focus on longer-term budget issues and greater oversight; and

process reform to limit the chaos in the Senate's consideration of budget resolutions and reconciliation bills, and establishing stronger incentives for the Senate to take up budget resolutions.6

Absent from the bipartisan letter is any suggestion that the supercommittee recommend budget resolution targets for revenue and spending levels. Nor is there any mention of "pay as you go" rules or of strictly enforcing those rules for tax cuts (including tax expenditures) or spending -- because that is exactly where there is no bipartisan agreement.

Instead of the budget "hammers" we need, the Senate Budget Committee's recommendations seem more like paintbrushes -- prettying up the budget process rather than making it more functional. None of them would force the tough choices needed for the task at hand.

B. But There Are Some Treats

1. Treat #1: Committees want to do their jobs. A common message running through the committee letters is that it wouldn't be right just to attack spending programs with a brute-force, indiscriminate sledgehammer. Let those who understand the policy issues surrounding the programs under their jurisdiction suggest the best ways to reduce spending. They understand that cuts to those programs are inevitable either way, so better that they have a say in it than to allow automatic cuts to happen.

Most notable in this "let Congress do its job" message are the bipartisan and bicameral letters from the agriculture and veterans affairs committees listing specific and substantial (and obviously bipartisan) proposals for spending cuts.7 The veterans affairs group seems to offer encouragement to the supercommittee by providing examples of past areas of bipartisan agreement on veterans' issues, emphasizing that "the budget must never be balanced on the backs of veterans, but there have been thoughtful, measured proposals enacted in past times of fiscal restraint."

In their letters to the supercommittee, appropriators argue (in my mind quite "appropriately") that discretionary spending is too heavily targeted for cuts, given the small fraction of the current federal budget and the even smaller fraction of the future fiscal pressures it represents. The deficit reduction accomplished thus far was very heavy on discretionary spending cuts, and the automatic, across-the-board cuts that would be triggered if the supercommittee and Congress fail to come up with a better, more thoughtful plan could prove too severe in a still-recovering, fragile economy.

The letters from the standing committees with jurisdiction over the spending programs suggest they would much prefer to be allowed to do their jobs and dictate where cuts are possible in their areas, rather than sit back and allow the cuts to be forced upon them.

2. Treat #2: Recognizing that it ain't easy. From the various committees with jurisdiction over discretionary spending programs comes this message: It's hard to cut much more from that spending without damaging the economy -- whether in the short term (threatening recovery to full employment) or the longer term (threatening supply-side economic growth by not investing in the most promising, most productive areas). And what about defense spending as the wars wind down -- can't that be cut substantially? Both Senate Armed Services Committee Chair Carl Levin, D-Mich., and ranking minority member John McCain, R-Ariz., make it clear in their letters that substantial cuts to defense spending mean cutting benefits to the military and their families -- that is, real people.8 This is the new guns vs. butter tradeoff, even within the defense budget. (The letters from the appropriations committees stress the same: Democrats warning against severe cuts to safety-net programs, Republicans emphasizing the hard choices regarding military benefits.)

Even as the committee letters carry a tone of defensiveness, and as they take turns defending their own particular "territories," they also make clear how all Americans benefit from different parts of the federal budget, and thus how cutting the budget and reducing the deficit will ultimately involve sacrifices from all of us. (And yes, it is a treat to be told that truth.)

3. Treat #3: Still some common ground. Let's try to stay optimistic and recognize that the recommendations are obviously partisan. There may still be common ground -- particularly regarding tax policy -- that wasn't touched on in the letters but that might very well still survive in secret. We can hope the tax-writing members might behave better in private with their supercommittee friends. What might they be saying privately?

Republicans might say they're willing to raise some revenue relative to the policy-extended baseline, but only if it comes from base-broadening reform that reduces personal income tax expenditures. They don't want to offer up that position while Democrats keep insisting on "class warfare" tax policy and raising taxes only on the rich.

Democrats might say they're willing to consider base-broadening tax reform if it's done in a progressive manner and if it would lead Republicans to accept a more revenue-heavy package. They might also admit that they agree with the Republicans that they don't want to reduce the corporate tax expenditures that seem to help job creation.

Those are the bipartisan ideas for tax reform that we've seen in almost all the bipartisan proposals for deficit reduction -- most notably from the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center. The notion of base-broadening tax reform (versus increases in marginal tax rates) being an important part of any big plan for deficit reduction is also supported by the U.S. Chamber of Commerce, although its letter to the supercommittee was careful not to spell out what it considers the right level of revenues or how much of the broader base it would like to see go to deficit reduction versus lower tax rates.9

Although there was no letter to the supercommittee from either side of the House Budget Committee (they are much farther apart philosophically than are the two sides of the Senate Budget Committee), ranking minority member Chris Van Hollen, D-Md. -- also a supercommittee member -- has publicly continued to emphasize the need for a balanced approach modeled after the bipartisan plans that would involve both revenue increases and spending cuts. He has said several times that what Congress chooses to do about the expiring tax cuts is a huge issue.

At an October 14 event at the National Press Club, Van Hollen said:

When the CBO director, Doug Elmendorf, testified before the Joint Committee, the testimony could not have been clearer. And he kind of laid out those two pieces. He made the point that if we stuck with current law instead of current policy, we would actually have $4 trillion in more revenue coming into the federal treasury and the deficit would be at a relatively -- at least over this short-medium term -- sustainable place. In other words, what he was actually saying to members of Congress is if you actually just packed up your bags and went home, we would actually be able to reduce the deficit considerably compared to where we are in current policy. And that is just a reality.10

And just because the Senate Budget Committee took a pretty timid stab at bipartisanship in its recommendations doesn't mean the supercommittee couldn't get the budget committees to pull more of their own weight in achieving the deficit reduction goal.

Let's hope some House and Senate Budget Committee members from both parties are whispering these "give me a hammer" sentiments to supercommittee members:

Require budget-resolution-like goals that are truly consistent with a balanced and big solution, setting aggregate levels of spending and revenues.

The effect would be to maintain a level of revenue and spending consistent with the Congressional Budget Office's current-law baseline, which, as Van Hollen has repeatedly pointed out, reduces deficits to economically sustainable levels in the 10-year window. Tax cuts could be extended only if the costs are offset with other revenue increases. If Congress can't find the offsets, the tax cuts will have to expire as scheduled. Either way, we achieve current-law revenue levels without committing -- at this point in time -- to current or any other particular law. The budget committees' job would be to enforce the pay-go rules but leave the tax policy changes consistent with those rules in the hands of the tax-writing committees, just like the budget committees' role in setting spending and revenue levels and reconciliation instructions in ordinary budget resolutions.

Do we really need strict, no-exception pay-go rules, given that sticking to current-law revenue levels would produce a "go big" solution (worth around $4 trillion over 10 years) that would far exceed the supercommittee's $1.5 trillion goal? Yes, because exemptions will surely still be argued for and perhaps granted in the future, but forcing each tax cut extension to be defended when it is debated is crucial in ensuring that future tax cuts are worth their cost.

C. Conclusion

It seems clear that the deficit reduction supercommittee needs to direct the standing committees on what to do, not the other way around.

To spur action on bipartisan, deficit-reducing tax reform, the supercommittee needs to seek "reinforcements" in more than just the tax-writing committees. In particular, the budget committees and their oversight of strong budget process and rules should play a crucial role in setting a path for "big" and "super" deficit reduction in a limited amount of time.

The supercommittee needs to dictate a bipartisan, compromise position to the tax-writing committees, even before they get started really debating and drafting tax reform. The supercommittee needs to give the taxwriters a revenue-level target for tax reform, not just a top-rate goal or a competitiveness standard or even a Buffett rule. It needs to require taxwriters to treat tax expenditures as if they are the spending programs under their jurisdiction and require that those tax expenditures be more thoroughly scrutinized and debated. Tax provisions shouldn't be given a free pass just because they're already in the system. The supercommittee could also require that the revenue targets be achieved by a minimum amount of base broadening over statutory marginal tax rate increases, recognizing that reducing tax expenditures can easily be done in progressive ways and that raising revenue in those ways actually shrinks the size and scope of government.

The budget committees are essentially hinting to the supercommittee that they must be forced -- that is, directed by the supercommittee -- to enforce the compromise tax positions. They won't suggest it themselves, but if the supercommittee creates hammer-like budget rules as part of its deficit reduction package, the budget committees would probably be happy to have an important role in tax reform. It will take active and forceful budget committees to change or advance policymakers' thinking on what tax reform must be today -- not just the old revenue-neutral variety, but the revenue-raising kind of reform.

With its Thanksgiving deadline, the supercommittee has neither the time nor the expertise to fully construct the budget rules and tax reform that will produce economically sustainable levels of deficits or even be sufficient to clear the $1.5 trillion deficit reduction hurdle. Its best possibility is to clearly direct the committees with jurisdiction over those policy areas to come up with the changes -- and to give them every incentive to actually follow through. But if the supercommittee merely transfers responsibility for making those future policy changes to the standing committees, wouldn't that be kicking the can down the road again? Won't we just wait until the can is back within striking distance and kick it again? Maybe. But it's better than throwing the buck away and losing the can. And I'm betting that in the 2012 elections, voters won't take kindly to more buck-passing and can-kicking.